Middle-Market M&A Review

Transcription

1 A Quarterly Corporate Investment Banking Division Publication 1st Quarter 214 Middle-Market M&A Overview and Trends In this Issue Despite a soft first quarter of 214, barring any major fiscal or systematic shock to the financial markets, there are a number of reasons to expect improving M&A deal volume for the remainder of 214. Middle-Market M&A Overview and Trends 1 Middle-Market M&A Statistics 2 In the first quarter of 214 global middle-market M&A activity declined 12.1% and 5.6% in terms of number of deals and deal value, respectively, compared to the first quarter of 213. However, we expect a brisk market for M&A activity in the coming months amid a robust financing environment, an improving global economy, rising equity markets and consumer confidence and decreasing uncertainty, as evidenced by the recovery of the financial services sector. The improving macro environment should increase interest in acquisitions among corporate buyers while favorable credit terms allow private equity investors to use increasing leverage. Between corporate balance sheets and private equity funds there is approximately $1.5 trillion of available capital for deployment. US middle-market M&A total deal value declined 5.8% in the first quarter of 214 compared to the first quarter of 213. While total deal value in the $25 million-to-$5 million range rose 12.4%, there was an 11.7% drop in deal value for transactions in the $5 million-to-$25 million range and a 34.2% drop in total deal value for transactions in the under-$5 million range. Postcrisis, there has consistently been more credit available for buyouts in the upper end of the middle market, which has had an impact on M&A activity. Enterprise Value/EBITDA multiples are the highest that they have been in at least a decade, ranging from 1.6x for smaller transactions to 14.2x for targets in the $25 million-to-$5 million range, largely driven by an increase in attractive debt financing available for middle-market deals. The composition of acquiring firms has remained relatively stable, with private and public firms accounting for about 45% and 26% of total deal volume, respectively. Private equity and foreign acquirers accounted for 13% and 16% of US middlemarket M&A volume in the first quarter. While raising private equity funds remains a challenge, increased distributions to investors in North America and Europe have freed up allocations in their private equity portfolios. The rally in the equity markets has impacted the valuations of acquisition targets, as evidenced by rising acquisition multiples. This trend seems to have created some hesitancy on the part of acquirers who look for opportunities to improve target company operations or who will need to achieve significant synergies to justify the price tag. By the same token, the buoyant stock market has propelled some target companies away from corporate suitors and private equity firms and toward the IPO option. Other factors, such as activist shareholder activity and regulatory risk have influenced M&A market dynamics, as well. Shareholder activism targeting companies deemed undervalued or undermanaged has resulted in efforts to unlock equity value through divestitures of non-core or underperforming lines of business. Regulatory risk has affected the market for larger, high-profile deals, especially in the telecom and media space, such as the proposed acquisition of Times Warner by Comcast. In summary, the abundance of cash on corporate balance sheets and uninvested private equity capital, in tandem with relatively available credit, a stable macroeconomic environment and strong market performance and thus far pent-up supply in the middle market is expected to entice sellers to come to the market from the resulting improved valuations. As such, we anticipate that the remainder of 214 should see an upswing in M&A activity. Notable Announced Q1 214 US Middle-Market M&A Transactions 5

2 Middle-Market M&A Statistics Figure 1 Global Middle-Market M&A Activity (1,2) Number of Deals 3,914 Africa / Middle East, 5.3% Latin America, 3.6% Europe, 18.5% Disclosed Deal Value $27.4 Billion Africa / Middle East, 4.1% Latin America, 4.2% Europe, 24.% Through the first three months of 214, the total number of global middle-market transactions decreased 12.1%, while disclosed dollar volume decreased 5.6% over the same time period in the prior year. North America, 2.5% Asia-Pacific, 52.% Asia-Pacific, 38.9% North America, 28.8% (1) Disclosed transactions as reported by Dealogic and research reports through 3/31/14. (2) Global middle-market defined as transactions involving targets with Total Enterprise Value ( TEV ) less than $5 million. Figure 2 US Middle-Market M&A Activity (1,2,3) Number of Deals 6, 5, 4, 3, 2, $3, $2,5 $2, $1,5 $1, Deal Value US middle-market deal volume through the first three months of 214 decreased 29.8% over the same period in 213, while disclosed dollar volume decreased 5.8%. 1, $5 <$5M $5M $25M $25M $5M Deal Value (1) Disclosed transactions as reported by Dealogic through 3/31/14. (2) Middle-market defined as transactions involving targets with TEV less than $5 million. (3) Dollars in billions. Figure 3 US Middle Market EBITDA Multiples (1,2) Average EV/EBITDA 16.x 14.x 12.x 1.x 8.x 6.x 4.x 11.9x 1.6x 14.2x Average purchase price multiples in the first three months of 214 for middlemarket transactions have surpassed the pre-recession highs observed in x.x Q13 1Q14 <$5M $5M $25M $25M $5M (1) Disclosed transactions as reported by Dealogic through 3/31/14. (2) Middle-market defined as transactions involving targets with TEV less than $5 million. Page 2

3 Middle-Market M&A Statistics (continued) Figure 4 US Middle-Market M&A Activity by Acquirer (1,2,3) Percent of Deals 6.% 5.% 4.% 3.% 2.% Public company acquisition activity increased to 28.5% over the last twelve months however, activity remains lower when compared to the levels observed in 24 to %.% LTM Private Public Private Equity Foreign (1) Disclosed transactions as reported by Dealogic through 3/31/14. (2) Middle-market defined as transactions involving targets with TEV less than $5 million. (3) LTM defined as Lastest Twelve Months. Figure 5 US Private Equity Activity (1,2) Capital Invested $9 $8 $7 $6 $5 $4 $3 $2 2,534 $491 $815 3,31 $362 2,434 $167 1,583 $374 2,232 $397 2,417 2,544 2,41 $45 $ $83 $ ,5 3, 2,5 2, 1,5 1, 5 # of Deals Closed US private equity activity witnessed one of the most active first quarters since 29 in terms of capital invested. However, the first quarter of 214 was not as noteworthy in terms of the number of deals closed Q13 1Q14 (1) Disclosed transactions as reported by PitchBook through 3/31/14. (2) Represents US-based buyout, growth, PIPE, recapitalization and add-on (excluding real estate investments) transactions only. Figure 6 Private Equity Backed Middle-Market EBITDA Multiples (1) Average EV/EBITDA 8.x 7.x 6.x 5.x 4.x 3.x 2.x 5.9x 6.9x 6.7x 7.1x Private equity firms have rewarded businesses with above-average EBITDA margins and revenue growth with a quality premium, but EBITDA multiples have generally remained in the 5.x to 7.x range over the last decade for middle-market, private equity-backed transactions. 1.x.x $1M - $25M $25M - $5M $5M - M M - $25M (1) Disclosed EBITDA multiples as reported by GF Data Resources through 12/31/13. Page 3

4 Middle-Market M&A Statistics (continued) Figure 7 Leveraged Lending Multiples (1) Total Debt Multuples 7.x 6.x 5.x 4.x 3.x 2.x 4.3x 5.x 5.8x Leveraged lending multiples continue to expand even as the market has witnessed a general pullback by the commercial banks in more aggressive deals. However, nonbank lenders and one-stops are more than filling the void. 1.x.x 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 <$1M EBITDA >$15M EBITDA >$25M EBITDA (1) Leveraged Lending Multiples through 3/31/14 per SPP Capital Partners. Figure 8 Private Equity Fundraising (1,2,3) $3 $25 $2 $15 $ $ $ $ $ $86 $ $131 $ No. Funds Closed Private equity fundraising continued the brisk pace seen in 213 as 74 funds closed on a total of $39 billion in the first quarter of 214. Coming off a robust 213 that saw the highest level of activity since 28, the first quarter of 214 could provide an indication that private equity fundraising is on pace for another strong year. $5 $ (1) Fundraising by US-based buyout, co-investment, mezzanine, restructuring/distressed situations, energy and PE growth/expansion funds as reported by PitchBook. (2) 214 data through 3/31/214. (3) Dollars in billions. Figure 9 Uninvested Capital for Buyouts (1,2) $6 $5 $4 $38 $439 $483 $482 $424 $39 $354 $391 As of the end of 213, private equity firms had over $39 billion in dry powder available for buyout transactions. $3 $259 $2 $186 $ Uninvested Capital (1) Private equity funds available for buyout transactions as reported by Preqin. (2) Dollars in billions. Page 4

5 Notable Announced Q1 214 US Middle-Market M&A Transactions Announcement Date Enterprise Value ($ mil) Target Company Acquiring Company Industry March LiveTV, LLC Thales Avionics, Inc. Technology March FreeWheel Media, Inc. Comcast Corporation Technology March Interplex Industries, Inc. Amtek Engineering Ltd Industrial February Chindex International Inc. TPG Capital, L.P.; Fosun Industrial Co., Ltd. Healthcare February Easton Baseball/Softball Business BPS Greenland Inc.; BPS Greenland Corp. Consumer February 3 5. Precision Dermatology, Inc. Valeant Pharmaceuticals International, Inc. Healthcare January Payment Processing, Inc. Global Payments Inc. Technology January JHP Pharmaceuticals, LLC Par Pharmaceutical Companies Inc. Healthcare January Eaton Corporation plc, Aerospace Power Dist. Safran SA Industrial January Johnson Controls Inc., Automotive Electronics Visteon Corporation Industrial January American Pacific Corporation H.I.G. Capital, LLC Industrial January Valeo Sylvania, L.L.C. Valeo SA Industrial Corporate Investment Banking Division Loop Capital Markets Corporate Investment Banking Division (CIBD) tailors a wide array of products in the debt and equity capital markets, along with providing strategic insight on mergers and acquisitions mandates, to satisfy each client's unique needs. Our depth of banking expertise and strong trading capabilities make us a trusted partner to top corporations and institutions. Loop Capital Markets has tripled the size of the corporate banking staff over the past three years, and participated in over $1.5 trillion in corporate debt and equity underwriting since the inception of Loop Capital Markets corporate investment banking business. Sidney Dillard, Partner sidney.dillard@loopcapital.com Daniel Horn, Managing Director dan.horn@loopcapital.com Thomas Rosén, Managing Director thomas.rosen@loopcapital.com Ani Tchaghlasian, Senior Vice President ani.tchaghlasian@loopcapital.com Paul Bonaguro, Head of Sales & Trading paul.bonaguro@loopcapital.com Stan Koss, Managing Director stan.koss@loopcapital.com Sreenu Tadavarthy, Managing Director sreenu.tadavarthy@loopcapital.com Shaan Kapoor, Vice President shaan.kapoor@loopcapital.com Loop Capital, founded in 1997, is a fullservice investment bank, brokerage and advisory firm that provides creative capital solutions for corporate, governmental and institutional entities across the globe. Loop Capital Markets and its affiliates serve clients in corporate and public finance, financial advisory services, taxable, tax-exempt and global equity sales and trading, analytical services, and financial consulting services. Headquartered in Chicago, the firm has over 16 professionals in 24 offices across the country. Find more information at Eric Lane, Vice President eric.lane@loopcapital.com Denis Appiah, Associate denis.appiah@loopcapital.com Corinne Charity, Analyst corinne.charity@loopcapital.com Jason Auguste, Associate jason.auguste@loopcapital.com Trent Schwartz, Analyst trent.schwartz@loopcapital.com Daniel Vellon, Analyst daniel.vellon@loopcapital.com Loop Capital is a registered trademark of Loop Capital Holdings, LLC. Securities and investment banking services are offered through Loop Capital Markets LLC. Loop Capital Markets LLC is a registered broker-dealer and a member of the Financial Industry Regulatory Authority (FINRA), the Municipal Securities Rulemaking Board (MSRB) and the Securities Investor Protection Corporation (SIPC). Loop Capital Markets LLC, an investment bank, prepared this document for informational purposes only. This product is not a research report and it should not be construed as such. Opinions expressed are our present opinions only and are subject to change without further notice. Loop Capital Markets LLC has or may have provided investment banking services to issuers referenced in this document. Any historical price(s) or value(s) are also only as of the date indicated and as applicable from any source that may be noted. The information contained herein has been prepared solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any trading strategy. Loop Capital Markets LLC shall have no liability, contingent or otherwise, to the user or to third parties, or any responsibility whatsoever, for the correctness, quality, accuracy, timeliness, pricing, reliability, performance or completeness of the data or formulae provided herein or for any other aspect of the performance of the materials.. Page 5